A Summary of Key Financial Ratios How They Are Calculated and What They Show Profitability Ratios 1. Gross profit margin Sales - Cost of goods sold Sales

An indication of the total margin available to cover operating expenses and yield a profit. 2. Operating profit margin (or Return on Sales) Profits before taxes and interest Sales

An indication of the firm's profitability from current operations without regard to the interest charges accruing from the capital structure 3. Net profit margin (or net Return on sales) Profits after taxes Sales

Shows after tax profits per dollar of sales. Subpar profit margins indicate that the firm's sales prices are relatively low or that costs are relatively high, or both. 4. Return on total Assets Profits after taxes Total assets or Profits after taxes + interest Total assets

A measure of the return on total investment the enterprise. It is sometimes desirable to add interest to after tax profits to form the numerator of the ratio since total assets are financed by creditors as well as by stockholders; hence, it is accurate to measure the productivity of assets by the returns provided to both classes of investors. 5. Return on stockholder's equity (or return on net worth) Profits after taxes Total stockholders' equity

A measure of the rate of return on stockholders' investment in the enterprise. 6. Return on common equity (Profits after taxes -Preferred stock dividends) (Total stockholders" equity - Par value of preferred stock)

A measure of the rate of return on the investment the owners of the common stock have made in the enterprise. More commonly referred to as "return on equity" or ROE. 7. Earnings per share (Profits after taxes - Preferred stock dividends) Number of shares of common Stock outstanding

Shows the earnings available to the owners of each share of common stock.

Liquidity Ratios

1. Current